The investigation
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In the course of the investigation we made enquiries of the Pensions Regulator, interviewed staff involved in the events complained about, and examined the Pensions Regulator’s papers (including all the papers the Pensions Regulator relied upon in reaching its decision). We also took specialist advice from external lawyers with expertise in the Pensions Act 2004. We also shared our provisional report and findings with Mr L and with the Pensions Regulator and I have taken account of their comments in reaching my decision. I have not included all the information found during the course of the investigation, but I am satisfied that nothing of significance to the complaint and my findings has been omitted.
Background and key events
Mr L worked for the Armstrong Group (Armstrong), which made car components and was bought by Caparo Automotive Limited in 1989. Caparo Automotive Limited thereby became the principal employer of the Armstrong Group Pension Scheme, which at that point had surplus funds. From 1989 until 1998 Armstrong took what was known as a ‘contributions holiday’ and made no employer payments to the pension scheme during this period. Contributions recommenced in 1999. In April 2002, however, Armstrong decided to wind up the pension fund.
Under the law that pertained at the time (that is, the Pensions Act 1995), as the sponsoring employer had taken a voluntary decision to wind up the pension scheme, the employer was required to inject funds into the pension scheme to bring it up to the Minimum Funding Requirement (MFR) funding level. The pension scheme was accordingly assessed and was found at 30 November 2003 to have statutory debt under section 75 of the Pensions Act 1995 of just over £36 million (the MFR would not provide sufficient funding to meet all the scheme’s liabilities).
The legislation did not require the necessary funds to be injected into the scheme immediately; it could be done over some years. It was also possible for the participating employers to seek agreement with the pension scheme trustees to compromise this debt and consequently for the employers to be required to pay in less than the total deficit as it had been actuarially calculated. In this instance although the section 75 debt was served on the employers in May 2004, the trustees agreed that it would not be enforced pending negotiations with Caparo Group Limited (in its capacity as the controlling company with ultimate responsibility for the participating employers). Negotiations on this continued throughout 2004 and into the early months of 2005, but did not result in resolution being reached. In May 2005, therefore, the trustees approached the Pensions Regulator to inform it that negotiations were on the point of breaking down and seeking its intervention. The same month Armstrong offered to pay a proportion of the deficit from future profits, but the trustees were apparently advised that there was no realistic prospect of any such payments being made in the foreseeable future. The trustees did not therefore believe that this proposal was in the best interest of the scheme members and declined the offer. Caparo Group Limited made a subsequent offer of £3.2 million, conditional on them receiving the trustees’ support for a clearance application that the Group were intending to make to the Pensions Regulator. The trustees refused that offer in February 2006.
On 13 March 2006 the participating employers were placed in voluntary receivership. With effect from 15 May 2006 (when the relevant employer insolvency events were notified to the Financial Assistance Scheme (FAS) administrators), the scheme became (and is still) within the scope of the FAS as the scheme had commenced wind-up prior to March 2005 and as the participating employers were insolvent (or, more precisely, were to be treated as such) for the purposes of the FAS. Its members would thus be entitled to receive ‘assistance’ from the FAS at the time when the scheme was finally wound up. Caparo Group Limited subsequently bought Armstrong’s business and assets.
In August 2006 the trustees’ representatives wrote to the Pensions Regulator, on the trustees’ behalf, expressing concern at what they described as the delay by the Pensions Regulator in reaching a decision on the issue of an FSD or CN. On 7 September 2006 the Pensions Regulator sent the trustees its preliminary view, which was that it would not be reasonable for it to issue an FSD in this case. The trustees then had a meeting with the Pensions Regulator on 27 September 2006, during which the Pensions Regulator agreed to consider further submissions and evidence that the trustees wished to put forward in support of the case for an FSD, which the trustees subsequently forwarded to it. However, on 14 December 2006 the Pensions Regulator issued its final decision, which was that it would not be reasonable for the Pensions Regulator to exercise its powers under section 43 of the 2004 Act. The reason the Pensions Regulator gave for reaching that conclusion was that ‘the overwhelming flow of benefit had been from Caparo Group Limited to the Participating Employer rather than vice versa’. The Pensions Regulator did not go into further detail, in part because of the restrictions placed on it in respect of the disclosure of restricted information (paragraph 28), but also because the Regulator believed that the level of detail provided was sufficient for the trustees to understand the decision.
On 14 February 2007 the trustees’ representatives sent the Pensions Regulator a submission in support of the issue of a CN. This argued that Caparo Group Limited had put the participating employers into administrative receivership with the primary intention of buying back their trade and assets as going concerns, but without the section 75 debt. On 10 April 2007 the Pensions Regulator responded saying that there was not sufficient evidence to support the contention that the main purpose or one of the main purposes of the act was to avoid the section 75 debt.
In June 2007 the trustees took the first step in judicial review proceedings, in the form of a letter before claim, on the grounds that the Pensions Regulator’s decision letters of 14 December 2006 and 10 April 2007 had not contained adequate or any reasons for the decisions not to exercise its powers and issue a CN or FSD. In its response of 4 July 2007, the Pensions Regulator maintained that adequate reasons had been given but nonetheless, on an ex gratia basis, provided the trustees with a summary of the analysis which underpinned the reasons for not taking regulatory action. The trustees decided not to proceed to judicial review.
Mr L told us, however, that the trustees had apparently felt unable to share with the scheme members the additional information provided to them by the Pensions Regulator. As a consequence, scheme members, including Mr L, continued to press the Pensions Regulator to disclose its detailed reasons underlying its decisions not to exercise its regulatory powers in this instance. The Pensions Regulator subsequently decided that, given the level of frustration expressed by scheme members in relation to their inability to understand why the Pensions Regulator was unable to use its moral hazard powers, it would seek the consent of the trustees and the relevant corporate entities to the Pensions Regulator disclosing that information. However, in October 2008, the Pensions Regulator wrote to Mr L, amongst other scheme members, explaining that, whilst the trustees had given their consent to such disclosure, the corporate entities had not. This was on the grounds that disclosure would involve revealing commercially sensitive information, which they would prefer to remain confidential.
In the meantime, on 5 December 2007, the Ombudsman had accepted Mr L’s complaint for investigation.
The Pensions Regulator’s comments
The Pensions Regulator’s staff told us that, in reaching their decision in this case, they had considered a great deal of information, including submissions and evidence received from the potentially affected parties. They had also encouraged the sharing of key submissions between the parties to ensure that the key issues of concern to the parties had been able to be debated, and thereafter considered by them.
The Pensions Regulator’s staff told us that the key difficulty for them was that they were unable, because of the legal restrictions on what they could disclose to the pensioners affected, to explain the detailed reasoning behind the Pensions Regulator’s decisions. They added, however, that that information had been provided to the trustees, who represented the scheme member’s interests. The Pensions Regulator’s staff said that they could understand why Mr L and others in the same position felt deeply frustrated by this, and indeed why it made them question whether the Pensions Regulator had taken those decisions appropriately. But there was nothing more that they could do about that, and they were satisfied that the matters in question had been properly considered.
Mr L’s comments
Mr L’s view of these events is that Caparo Group Limited took over the company he worked for and ran its previously healthy pension scheme into deficit, then distanced itself through a subsidiary company to escape liability for the pension difficulties.
Mr L believes that the ‘moral hazard’ provisions were specifically introduced to prevent what happened in this case, and he can therefore see no justification for the Pensions Regulator’s decisions not to issue a CN or FSD. He believes the Pensions Regulator should force Caparo Group Limited to honour its ‘obligations’ to Mr L’s pension scheme.
Having had sight of a draft version of this report, Mr L remained of that view. He held that the benefit flow was clearly in favour of Caparo Group; that their offer of £3.2 million implied acceptance of a debt to the pension scheme; that the move to place the participating employer in receivership was done solely for the reason of avoiding the debt; and that more emphasis should have been placed on the substantial assets of Caparo Group at the time the decision was taken to wind up the scheme.
Findings
Mr L’s complaint (as set out in paragraph 1) is that the Pensions Regulator failed to exercise its statutory functions properly and its discretion reasonably. The first question to be considered is therefore whether the process that the Pensions Regulator has followed is in line with the relevant statutory provisions.
We have accordingly looked very closely at the process the Pensions Regulator followed, and in particular whether we are satisfied that the two-stage process described in paragraph 29 is in line with the provisions set out in section 95 of the 2004 Act. We are satisfied that it is, and that the Pensions Regulator was therefore acting within its statutory powers in this regard.
The next question is, therefore, whether the Pensions Regulator has ‘got it right’ (paragraph 16) in terms of its discretionary decision-making. In other words, has the Pensions Regulator reached a reasonable decision based on all relevant considerations? This involves considering whether the Pensions Regulator has misdirected itself as to a matter of law, or has failed to have regard to all relevant considerations, or has had regard to an irrelevant consideration.
The key difficulty we face here is how little of the evidence we have seen and considered can be set out in this report. Although the Ombudsman can require to see all the evidence relevant to her investigation (paragraph 8), and reflect that evidence in her report of her investigation to explain the decision she has reached, to do so in this instance would completely undermine the provisions of the 2004 Act, which are specifically designed to preserve the confidentiality of certain restricted information provided to the Pensions Regulator (paragraph 28). It would clearly not be appropriate for the Ombudsman to subvert the intention of Parliament by releasing that information through her report.
The most that I can therefore do in this report is to reassure Mr L that we have looked very closely at all of the relevant papers, and have considered very carefully the implications of their content. We have also shared key relevant documents with our specialist external advisers and discussed the information we have seen with them, as well as the content and intent of the relevant legislation. Having done so, we are satisfied that there is no evidence to suggest that the Pensions Regulator has misdirected itself as to a matter of law, or has failed to have regard to all relevant considerations, or has had regard to an irrelevant consideration. Accordingly, there is no evidence to suggest that the decision the Pensions Regulator reached was wholly unreasonable, and therefore no evidence that it exercised its discretion unreasonably.
Conclusion
I do not uphold Mr L’s complaint. I am satisfied that the Pensions Regulator acted within its statutory powers and did not exercise its discretion in an unreasonable way.
Ann Abraham
Parliamentary and Health Service Ombudsman
June 2010
